Barron's on ExxonMobil: 'What a Gusher'

Barron's cover story this week is What a Gusher! (subscription might be required), an article about Exxon Mobil Corporation (XOM). Given that I am net long Exxon Mobil and that I wrote two articles recently on oil, I enjoyed reading Andrew Bary's well written article.

As an aside, my recent two prior articles are Do Not Believe Long Term Oil Forecasts and Long Term West Texas Intermediate Forecast Price And Uncertainty. Both articles were popular and generated some lively comments over at Seeking Alpha Don't Believe Long-Term Oil Forecasts and Don't Believe Long-Term Oil Forecasts: Part II.

While I encourage you to read the full article in Barron's, I will provide a few quick highlights.

Although Exxon Mobil is well managed, it is second from the bottom in Dow performance this year. Some suggest that fair value for Exxon Mobil is $90 per share. At present prices, the refining and chemicals divisions are being given away. Exxon is known for its financial discipline where it focuses on profits, not on production. Consequently, it enjoys the highest return on invested capital at 34%. Moreover, because of its discipline, it does not enjoy feasts of activity during the good times, or famines during the bad. Instead, it remains focused on its planned activities. It has replaced more than 100% of its production during the last 15 years at an average cost of less than $7 per barrel, which is below that of its peers'. During the past five years, Exxon has favored stock buybacks over dividends.

As the leading energy company with the most diversified revenue base, Exxon is the most defensive play in its group, which includes BP (BP), Chevron (CVX), ConocoPhillips (COP) and Royal Dutch Shell (RDS-A). Exxon's defensive characteristics and sheer size have worked against it because aggressive institutional investors now favor oil-and-gas-exploration stocks like Apache (APA) and XTO Energy (XTO), or oil-service stocks like Schlumberger (SLB) that offer more leverage to rising energy prices.

...

It isn't easy to maintain, let alone increase, such production, particularly because Exxon and its international rivals face a diminishing set of opportunities, given increasing resource nationalism in the Middle East as well as in places like Venezuela and Russia. It's estimated that 85% of the world's oil reserves are locked up in OPEC countries and the former Soviet Union, where access comes on tough terms to Western oil companies, if at all.

In my prior article, I wrote:

And, the rise of oil prices has given new prominence to some national oil companies. A sample, though incomplete, list of companies include: Gazprom OAO (OGZPY.PK), Petróleos de Venezuela, S.A., and Petróleo Brasileiro S.A. - Petrobras (PBR).

Because the Barron's article is a great summary of Exxon Mobil, I have printed and saved a copy for future reference. I encourage you to do the same.

Author's Disclosure: I am long Exxon Mobil stock as well as long and short puts for an overall net long position.

Comments

[Tom Armistead]

XOM is pretty seriously underpriced for a defensive stock in uncertain times.

The direction is almost certainly up: the magnitude of the move may not be large.

So leverage by means of options might be helpful to give the situation some pop.

Net long XOM by means of diagonal call spreads.

2009 Nov 15 09:03 AM

[bindlepete]

As I have suggested for the last two years Exxon is sifting it's focus to natural gas. Their LNG play has been a failure here in the US as the glut of gas has developed.

They still hold patents on the geopressured resources (aka deep gas) that few seem willing to challenge. Every one is permitted to screw up now and then so they will likely go after the Asian market with their LNG.

Without government interference - not to be ruled out- the domestic market is thank God, pretty close to a dead issue.

2009 Nov 15 11:53 AM

[epeon]

I have liked big oil for some time. I have heard it stated that it takes $1 Trillion per year in investment just so that the world oil capacity remains constant. We have not been spending that money. So, I think depletion will continue to maximize oil's value over the next few years. Alternative energy is insignificant. It is just this year's ethanol. I have, however, preferred BP because of the dividend. I don't know when the next oil spike is coming, but I would rather be collecting a 6% dividend while I wait.

2009 Nov 16 09:17 AM

[Gravity404]

epeon - you get get more shareholder value through stock buy backs, where XOM put it's money. Why not have both?

2009 Nov 16 10:05 AM

[bindlepete]

Epeon a billion a year to hold a stable reserve position? Forget it . The new stability in reserves will be in money as prices rise and reserves shrink. Only two places to go now for new big finds . Africa and get nationalized, and the Tar Sands and heavy oil.

2009 Nov 16 10:10 AM

[Ferdinand E. Banks]

Concentrating on profits instead of production. I know of another 'major' which expressed precisely that intention, and there may be more. This kind of thinking is one of the downward pressures on oil output and so....

2009 Nov 16 10:16 AM

[jarco]

I prefer the contrary outlook. The key to oil is discovery and the potential for XOM given its size is exponentially diminishing. They made significant pre-shale investments in natural gas but unfortunately for them nearly all in "conventional" plays as opposed to shale where XTO, CHK, et al have found major albeit market cheap discoveries.

Having been in big oil positions (XOM & COP, for example) for the last 20 years, its time to move on to smaller more nimble players.

2009 Nov 16 11:19 AM

[Gravity404]

jarco - You are absolutely correct. Smaller more nimble, well-managed companies I have done very well with - DVN, APA, MRO. But I think you need to have some money in the big boys too. CVX has done very well over the past 8 month run up, and look at the long term XOM chart.

2009 Nov 16 03:27 PM

[toobad41]

I fully agree that these integrated oil companies such as ExxonMobil, Chevron, or BP are solid bets for the long haul but these are so huge that it takes a lot of effort to move them. If you are just interested in parking your money this would be a good bet.

2009 Nov 16 09:48 PM